BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION
450 N Street, Room 121
Sacramento, California
REPORTER'S TRANSCRIPT
DECEMBER 15, 2010
FINAL ACTIONS
P.M. SESSION
Reported by: Beverly D. Toms
No. CSR 1662
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2 P R E S E N T
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4 For the Board Betty Yee
of Equalization: Chair
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Jerome E. Horton
6 Vice-Chair
7 Barbara Alby
Acting Member
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Michelle Steel
9 Member
10 Marcy Jo Mandel
Appearing for John
11 Chiang, State Controller
(per Government Code
12 Section 7.9)
13 Diane Olson
Chief, Board
14 Proceedings Division
15 Board of Equalization
staff: David Levine
16 Tax Counsel IV
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2 ITEM C4
3 Sacramento, California
4 December 15, 2010
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6 MS. YEE: Okay, our next item, Ms. Olson.
7 MS. OLSON: Our next item are those matters
8 taken under submission.
9 MS. YEE: Okay.
10 MS. OLSON: Our first item is C4, Lockheed
11 Martin Government Services, Incorporated.
12 MS. YEE: Okay. Members, we're back on C4,
13 Lockheed Martin Government Services, Incorporated.
14 May I have a motion, please.
15 MS. MANDEL: I guess I'd move to determine.
16 I'm -- I'm concerned about the Department's assertion
17 that this would completely blow out transfers --
18 electronic transfers of software and load them and
19 leave. I mean that -- maybe it's not related but
20 that -- that's a huge concern to --
21 MS. YEE: Yes.
22 MS. MANDEL: -- do that through the case like
23 this, but the diskette-computer comparison seems
24 comparable, so it's a little confusing, but the
25 assertion that we're going to blow -- blow out the 1502
26 exclusions is pretty severe.
27 MS. YEE: Okay. So your motion, Ms. Mandel, is
28 to redetermine?
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1 MS. MANDEL: Yeah.
2 MS. YEE: Okay, I'll second that motion.
3 Discussion? Further discussion?
4 Okay. Okay, we have a motion and a second to
5 redetermine. Please call the roll.
6 MS. OLSON: Madam Chair.
7 MS. YEE: Aye.
8 MS. OLSON: Ms. Alby.
9 MS. ALBY: Pass for a minute here.
10 MS. OLSON: Ms. Steel.
11 MS. STEEL: No.
12 MS. OLSON: Mr. Horton.
13 MR. HORTON: Aye.
14 MS. OLSON: Ms. Mandel.
15 MS. MANDEL: Now I'm making my own self
16 nervous.
17 Well, because I walked in here and I -- you
18 know, I know it's my motion, but I -- I don't like the
19 result that I'm getting told is going to happen.
20 I don't like that result.
21 MS. STEEL: I think we should make a new
22 annotation because computers been, you know, so
23 different now than before, so abide the annotation that,
24 you know, we read it's totally I think taxpayer was
25 right, but we cannot -- I cannot really go for a hundred
26 percent at the same time, but you know what, I -- you
27 know, by the law that what we did here that, you know,
28 they're -- I cannot really say they're wrong, either.
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1 So --
2 MR. HORTON: Madam Chair.
3 MS. YEE: Let me just get this vote dispensed
4 with. We're in the middle of the roll call.
5 MS. MANDEL: Well, now that I made myself so
6 nervous maybe I should withdraw it.
7 MS. YEE: Okay, you want to withdraw --
8 MS. MANDEL: I hate it when I get that -- you
9 know --
10 MS. YEE: That's all right.
11 MS. MANDEL: -- that feeling.
12 MS. YEE: We can discuss it further.
13 You want to withdraw the motion and --
14 MS. MANDEL: Yeah, I'll -- I'll withdraw it for
15 the moment.
16 MS. YEE: Okay.
17 MS. MANDEL: But that's -- I mean, I see two
18 different things. I see the diskette and the computer,
19 and it sounds like it's analogous. But I don't know why
20 they do the diskette that way and then the computer not,
21 except that they have the argument that they -- that the
22 vet -- that the value's not really in the computer
23 because they separately have all the software about
24 which there seems to be some dispute.
25 But I -- I really do have a very serious
26 concern about the Department's assertion that if -- if
27 it's -- if these computers are not transferred in
28 substantially the same form because the software is
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1 loaded after the computers are acquired by the person
2 who's going to sell them to the government, that that
3 necessarily undoes the Board's long-standing position on
4 software transfers.
5 That -- I -- you know.
6 MS. YEE: Mr. Levine, do you have a --
7 MR. LEVINE: Yeah. Just for the record, I'm
8 not sure exactly the words they used but that can't be
9 what they mean. The Board -- it's -- in your regulation
10 you're required to follow load and leave and the
11 electronic transfer unless and until you change the reg.
12 A decision here, whatever you decide, won't
13 affect that. I think what the Department was trying to
14 say is its view that it was inconsistent defined that
15 this was a fabrication of the computer by adding on
16 software under facts that if it was just a -- a load and
17 leave on someone else's software would not be taxable.
18 And if it's not taxable, which is what the reg. just
19 said, it's not taxable, that means it's not fabrication.
20 So the Board has taken the position by
21 regulation that a load and leave is not fabrication.
22 And I think that's what the Department is saying, is
23 that the Board's reg. stands for the proposition that
24 the installation of the software was not fabrication and
25 it really shouldn't be regards as substantial change in
26 form, which again unless we're talking about trees that
27 grow, we normally look at as changes, because we look
28 at -- at plants that grow, at a certain point they're
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1 something different than they were. We recognize that.
2 But otherwise we normally look to some form of
3 fabrication to change the form.
4 MS. MANDEL: So that's why they said that --
5 that -- for the taxpayer is basically arguing they're
6 doing fabrication.
7 MR. LEVINE: Well, I don't want to put words in
8 their mouth here.
9 MS. MANDEL: Well, not fabricate, that's a
10 magic word for sales tax.
11 MR. LEVINE: Yeah, we view it as they really
12 need to be fabricating to change the form. I think
13 they're just relying on -- mostly on value.
14 MS. MANDEL: Yeah.
15 MS. YEE: Ms. Alby.
16 MS. ALBY: I'm actually (inaudible.)
17 MS. YEE: Well -- just ready to vote for the
18 motion.
19 MS. MANDEL: Yeah. Well, that's -- you know,
20 that's -- so --
21 Yeah -- that's just my -- you know, that's my
22 feeling on the whole thing.
23 MS. YEE: Other thoughts, Members?
24 MS. MANDEL: I also don't know that we know
25 even if you went some other way that you know exactly
26 what -- how much of anything was, but -- you want the
27 motion again?
28 MS. STEEL: We can come back.
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1 MS. MANDEL: Maybe I didn't eat enough and it's
2 my blood sugar and not eating.
3 MS. STEEL: You need some sugar.
4 MS. MANDEL: But that happens, too.
5 MS. YEE: Do you want to put this over?
6 MS. MANDEL: Yeah.
7 MS. YEE: It will be to the next meeting,
8 though.
9 MS. MANDEL: Oh, I don't want to wait that
10 long.
11 MS. YEE: Yes.
12 MS. MANDEL: I don't think we need to wait that
13 long.
14 MR. LEVINE: Later this afternoon?
15 MS. STEEL: No, after we vote other stuffs then
16 we can --
17 MS. YEE: Yeah, let -- let's come back to it at
18 the end of the other items. Maybe we'll be inspired
19 then. Our next item?
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1 ITEMC5
2 MS. OLSON: Our next item is C5, Sunkist
3 Enterprises Corporation. This was a waived appearance.
4 MS. YEE: Okay. Item C5, Sunkist Enterprises
5 Corporation.
6 MR. HORTON: Move to adopt.
7 MS. YEE: Staff recommendation?
8 MR. HORTON: Yes.
9 MS. YEE: Okay. Motion by Mr. Horton to adopt
10 the staff recommendation, second by Ms. Mandel.
11 Discussion?
12 MS. STEEL: Well, I wish taxpayer showed up and
13 just to show clear evidence for transfer. Then -- Mr.
14 Levine looking at me.
15 MR. LEVINE: I -- I don't think there was ever
16 a dispute that we're talking about the same corporation.
17 They were talking about transferring ownership by
18 selling shares, but we're just focused on the person
19 before us, which is the corporate entity. So, however
20 they sell the shares is irrelevant to that issue. It
21 may be relevant to like a 6829 case, but that's not what
22 we have here.
23 MS. STEEL: But did we go -- are we going after
24 the -- Irfan Mahmood?
25 MR. LEVINE: I'm not aware of anything else
26 other than the assessment against the primary taxpayer.
27 If it can't be sustained against the primary taxpayer it
28 couldn't be sustained against anyone.
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1 MS. STEEL: No, I'm just asking that because
2 somebody who caused this trouble is different person
3 than who used to own. He could have gone to close
4 the -- a seller's permit but he didn't do that.
5 MR. LEVINE: Yes.
6 MS. STEEL: But I'm -- I'm going to go for the
7 staff recommendation because he didn't come but, you
8 know, I was reading it and it was just a -- that's what
9 I found out. So --
10 MS. YEE: Okay. I have a motion by Mr. Horton,
11 second by Ms. Mandel, to adopt the staff recommendation.
12 Without objection, such will be the order.
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1 ITEM D2.
2 MS. OLSON: Our next item is D2, CRC/TR
3 Corporation.
4 MS. YEE: Okay. Item D2, CRC/TR Corporation.
5 May I have a motion, please.
6 MR. HORTON: Move to adopt staff
7 recommendation.
8 MS. YEE: Okay. Motion by Mr. Horton to adopt
9 the staff recommendation. Is there a second?
10 MS. MANDEL: Second.
11 MS. YEE: Seconded by Ms. Mandel.
12 Discussions?
13 Hearing none, objection?
14 Motion carries.
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1 ITEM C4 (Continuing).
2 MS. YEE: Okay.
3 MS. OLSON: That brings us back to C4, Lockheed
4 Martin Government Services, Incorporated.
5 MS. YEE: Okay.
6 MS. MANDEL: Well, then I'll -- I'll renew the
7 motion to redetermine.
8 MS. YEE: Okay.
9 MS. MANDEL: Board be consistent in its view of
10 software.
11 MS. YEE: Okay. Motion by Ms. Mandel to
12 redetermine. I'll second that motion.
13 MR. HORTON: May I --
14 MS. YEE: Mr. Horton.
15 MR. HORTON: -- comment. This is somewhat of a
16 Catch 22 in that ruling in favor of the taxpayer
17 actually rules against the taxpayer in subsequent
18 transactions. And in the absence of any documentation
19 that indicates that title has passed to the U. S.
20 Government prior to, it's difficult to assess the --
21 even the -- the value of the -- of the modifications to
22 the point that that value actually changes the
23 characteristics of the initial property purchased. And
24 then the confusion as to who actually performs the
25 service, is it performed by the vendor and at what point
26 does the seller get involved and engaged in that, in
27 that aspect.
28 Despite our efforts to -- to try to -- to get
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1 there, to a point where the title either passes to the
2 U. S. Government or these are actually not transferred
3 to the U. S. Government in substantially the same form.
4 We start out with a computer and then there's a change
5 in the -- in the -- there's a change in the valuation
6 but not a change in the character or the form of the --
7 of the property. And I think we have to defer back to
8 the law in determining -- in the law in determining --
9 in the regulations, not the annotations, in determining
10 what governs.
11 Is it the -- is it the valuation or is the --
12 the definition pursuant to the law, pursuant to Webster
13 and so forth that will indicate a substantial change.
14 And the inherent danger that -- that I see here
15 is -- is one way the taxpayer wins; the other way the
16 taxpayer loses. But at the end of the day I think
17 ultimately the taxpayer would lose because of the
18 intrinsic value of the change if in fact it was treated
19 as a lease to non-U. S. Governments.
20 And a ruling of that nature would cause
21 significant change throughout the industry, whereas
22 others will begin to rely on that and that type of
23 ruling would actually increase the taxes for a lot of
24 folks that have made a conscious decision to minimize
25 their tax liability by paying the taxes up front on the
26 acquisition and not on the subsequent markup to the
27 transaction.
28 So it's that culmination in -- of those --
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1 those concerns as well as Ms. Mandel's concerns that
2 kind of gives me pause but causes me to have to go to
3 the greater good.
4 MS. YEE: Okay. Thank you, Mr. Horton. Other
5 comments, Members?
6 Okay, we have a motion and a second to
7 redetermine.
8 Objection? Yeah, please call the roll.
9 MS. OLSON: Madam Chair.
10 MS. YEE: Aye.
11 MS. OLSON: Ms. Alby.
12 MS. ALBY: Aye.
13 MS. OLSON: Ms. Steel.
14 MS. STEEL: No.
15 MS. OLSON: Mr. Horton.
16 MR. HORTON: Aye.
17 MS. OLSON: Ms. Mandel.
18 MS. MANDEL: Aye.
19 MS. OLSON: Motion carries.
20 MS. YEE: Okay. Our next item?
21 MS. OLSON: That concludes our -- all of our
22 items for today.
23 MS. YEE: Okay. Thank you very much, Members.
24 We will recess until 9:30 tomorrow morning.
25 Thank you.
26 ---oOo---
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1 REPORTER'SCERTIFICATE
2
3 State of California )
4 ) ss
5 County of Sacramento )
6
7 I, BEVERLY D. TOMS, Hearing Reporter for the
8 California State Board of Equalization certify that on
9 December 15, 2010 I recorded verbatim, in shorthand, to
10 the best of my ability, the proceedings in the
11 above-entitled hearing; that I transcribed the shorthand
12 writing into typewriting; and that the preceding 14
13 pages constitute a complete and accurate transcription
14 of the shorthand writing.
15
16 Dated: December 23, 2010.
17
18
19 ____________________________
20 BEVERLY D. TOMS
21 Hearing Reporter
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